Monocyte-derived macrophages accumulate and process cholesterol in atherosclerotic lesions. Because of the importance of this process, we examined the interaction of cholesterol crystals and acetylated low density lipoprotein (AcLDL) with human monocyte-macrophages in a combined chemical and morphological study. These two forms of cholesterol induced extensive compartmentalization of the macrophage cytoplasm. Unexpectedly, the compartments maintained a physical connection to the extracellular space as demonstrated with ruthenium red staining. The compartments formed through invagination of the top surface of the macrophage plasma membrane. Some cholesterol crystals and AcLDL were sequestered within these surface-connected compartments for up to five days in the case of the crystals and for 1 day in the case of AcLDL. Pulse-chase studies of fractionated macrophages indicated that 3H- cholesterol redistributed from the surface-connected compartments into lysosomes (where the cholesterol remained unesterified) and into lipid droplets (where the cholesterol was stored as cholesteryl ester). Intracellular uptake and esterification of cholesterol was blocked by cytochalasin D. However, once cholesterol was sequestered in the surface-connected compartments, subsequent esterification of the cholesterol could not be inhibited by cytochalasin D. Apolipoprotein E was localized within the surface-connected compartments by immunogold labeling suggesting a possible function for this protein in the processing of lipid taken up through the sequestration pathway. Removal of microcrystalline cholesterol from the medium resulted in release of most of the accumulated cholesterol microcrystals from the macrophages, as well as disappearance of the surface-connected compartments. Thus, sequestration is a novel endocytic mechanism in which endocytic compartments remain connected to the extracellular space. This differs from phagocytosis where endocytic vacuoles rapidly pinch off from the plasma membrane. Sequestration provides a means for macrophages to remove substances from the extracellular space of lesions and later release them, possibly when these macrophages re-enter the blood stream.